I’ve written to my local MP precisely once, some years ago.
But I’m about to do it again.
And the subject that I’m going to write to him about is exactly the same subject as on the previous occasion: shareholder taxation.
Why? Because an HMRC consultation on stamp duty on shares has just concluded, and HMRC – and doubtless the Treasury – will soon be weighing the various submissions made by interested parties.
In other words, the data-gathering phase has ended. The political phase is about to begin. And nervous MPs — there’s a general election next year, don’t forget — will be wanting to let the Chancellor know their views. Or rather, the views of their constituents.
Dividend taxation: from zero to monstrous, in eight short years
Ordinary investors – people like you and I – might imagine that Conservative governments, and Conservative Chancellors, are somehow ‘on their side’.
Not so.
It was a Conservative government that introduced dividend taxation, for instance, which took effect from the 2016/2017 tax year. The tax-free dividend allowance was set at £5,000. Dividend earnings in excess of that were taxed at 7.5% for basic rate taxpayers, 32.5% for higher-rate (40%) taxpayers, and 38.1% for additional-rate (45%) taxpayers.
The following year, the tax-free allowance was cut to £2,000 – and now, from Jeremy Hunt’s first Budget, last autumn, to £1,000. And then cut again to £500, from next April. Oh yes, and by the way: 1.25 percentage points have been added to the actual tax rates, so that 7.5% hit for basic taxpayers is now 8.75%, for instance.
Not so long ago, we’d have all paid nothing.
And all of this, remember, is double taxation of corporate profits that have already been taxed. It’s just the ownership of those profits that has changed.
Stamp duty: a tax on investment
So what is this stamp duty consultation all about?
Buy shares, and you pay stamp duty – a tax on investment, in short. You don’t pay it on selling shares, and it’s not a tax on profits – it’s a tax on investing. On putting money aside for a rainy day, or investing for retirement, in other words.
You’re buying those shares inside a tax-sheltered ISA, or a tax-sheltered SIPP? Tough: you’ll still pay stamp duty.
Why are we all paying stamp duty? It beats me: I don’t know.
What does it achieve? As far as I can see, it simply siphons off some of the money that investors – i.e. voters – are putting aside for retirement, or for a rainy day, and leaves them with less to invest.
Which for a government supposedly intent on promoting self-reliance, saving, and investing, is a rather curious way of going about things.
Stamp duty’s perverse incentive mechanism
It gets sillier, as the venerable Association of Investment Companies (AIC) pointed out last week. An activist trade body for REITs and investment trusts, the doughty AIC has a decent track record when it comes to promoting the interests of investors like you and I.
And its representations to the HMRC made a telling point, last week.
Buy shares in an investment trust, and you’re essentially buying a basket of shares. The popular City of London Investment Trust, for instance, holds shares in Shell, Unilever, HSBC, Diageo, AstraZeneca, BP, British American Tobacco, and so on.
More to the point, buy shares in an investment trust, and you’ll pay stamp duty.
But buy that same basket of shares in an ordinary investment fund or mutual fund, putting money aside for a rainy day, or your old age, and you won’t pay that stamp duty.
Yet investment funds typically have higher charges, and lack real-time tradeability – features that make them relatively unattractive to investors, like you and I, who care about such things.
Despite which, ‘the system’ is geared towards pointing investors to those investment funds, through the stamp duty mechanism.
Time for change
All in all, the tax treatment of investments seems ripe for an overhaul. Taxing prudent investment – through stamp duty, and the double taxation of company profits through dividend taxation – doesn’t seem fair.
As I shall be pointing out to my MP.
Will it make a difference? I’ve no idea.
But in the case of an unpopular government in the run-up to an election – who knows? It might.
